NEW YORK (BBH FX Strategy) -- The U.S. dollar is trading within Monday's ranges against the major foreign currencies Tuesday. The main exception is the Australian dollar, where the central bank kept rates on hold, but encouraged the market to look for a rate cut next month.The unwinding of long AUD cross positions helped lift the yen after the Bank of Japan reported the first decline in its monetary base in three years. The dollar fell to its lowest level against the yen in nearly a month, with reported purchases by Japanese importers helping to steady the greenback near JPY81.50. This, in turn, helped the other main yen crosses recover from earlier losses.
The RBA's comments that output growth is slower than previously anticipated, following Monday's dismal building approval data (-7.8% in February compared with consensus for a 0.5% increase) and Tuesday's more mild disappointment on retail sale (0.2% vs consensus of 0.3), will keep the focus on domestic variables for the policy outlook. As we noted Monday, in the most recent reporting week, the net long AUD futures positions grew because the shorts covered. Some players appear to be re-establishing short positions and the Australian dollar has scope to test the $1.03 area. A break there could spur another 2 cent decline, especially if the CPI moderates. The market anticipates 80 basis points in cuts over the next 12-months.
However, investors should not read too much into Tuesday's data since it will be heavily distorted by the carnival holidays. More importantly, President Dilma is scheduled to speak at 10am local time (9am EST) and is widely expected to announce further measures to boost growth. Locals speculate that the announcement will focus on tax measures to boost the industry along with additional funding for the development bank BNDES by as much as R$30 billion. The automobile sector is thought to be one of the greatest beneficiaries. The Bovespa outperformed most global bourses in expectation of the measures but the BRL underperformed as some feared foreign-exchange-related measures may also creep into the new package. We think USD/BRL will stay above the 1.80 level for now, but we expect the pair to gradually make its way back toward the 1.75 later in the year.